As the telecommunications “New Code” approaches its third birthday, the County Court has issued its Judgment in the case of Vodafone Limited v Hanover Capital Limited [2020] EW Misc 18 (CC).
The case was heard by Martin Rodger QC, Deputy President of the Upper Tribunal, sitting as a County Court judge. It is the first Judgment concerning the renewal of a telecommunications lease under the Landlord and Tenant Act 1954 (“the 1954 Act”) since the New Code came into force.
The case was heard by Martin Rodger QC, Deputy President of the Upper Tribunal, sitting as a County Court judge. It is the first Judgment concerning the renewal of a telecommunications lease under the Landlord and Tenant Act 1954 (“the 1954 Act”) since the New Code came into force.
Background
Vodafone (“the Operator”) occupies a telecommunications site adjoining the car park of an office building in Greater Manchester (“the Site”). It took occupation under a five-year lease on payment of a £10,000.00 premium and a peppercorn rent (“the Lease”).
The Lease enjoys the protection of the security of tenure provisions of the 1954 Act. The provisions of the New Code provide that the agreement must, on this occasion at least, renew under the 1954 Act and not under the New Code’s distinct renewal procedures.
After service of a Section 25 notice, renewal proceedings were issued by the Operator in August 2017, three months before the commencement of the New Code – the Defendant (“the Site Provider”) later acquired the Site.
Terms in Dispute
By the time of the hearing most terms were agreed, leaving the following to be determined.
Vodafone (“the Operator”) occupies a telecommunications site adjoining the car park of an office building in Greater Manchester (“the Site”). It took occupation under a five-year lease on payment of a £10,000.00 premium and a peppercorn rent (“the Lease”).
The Lease enjoys the protection of the security of tenure provisions of the 1954 Act. The provisions of the New Code provide that the agreement must, on this occasion at least, renew under the 1954 Act and not under the New Code’s distinct renewal procedures.
After service of a Section 25 notice, renewal proceedings were issued by the Operator in August 2017, three months before the commencement of the New Code – the Defendant (“the Site Provider”) later acquired the Site.
Terms in Dispute
By the time of the hearing most terms were agreed, leaving the following to be determined.
- Term Length and Tenant Break Clause
Section 33 of the 1954 Act requires the Court to set a term length which is “reasonable in all the circumstances”. The existing Lease term (five years) may be relevant, but the Court is not compelled to repeat it. Each case turns on its own facts.
The inclusion of a break clause is determined pursuant to Section 35; long-standing case law[1] tells us that the Court must have regard to the terms of the existing Lease and to “all relevant circumstances”. As the Lease included no break clause, the burden was on the Operator to justify its inclusion.
The Operator relied on several arguments in favour of a three-year term with a rolling unconditional break (with six months’ notice). The most substantive was the Operator’s desire for a greater degree of flexibility following imposition of the New Code, and the changing environment in which it now operates.
This argument centred on several points. The Operator wanted to ensure it could respond to decisions in forthcoming appeals[2] quickly if favourable outcome(s) are secured. Favourable outcome(s) could again alter the renewal landscape and permit renewal under the New Code (potentially lowering rents). The Operator might also then be able to seek additional rights under the New Code.
The Site provider argued that a ten-year term (+ five-year break) would secure a balance between the Operator’s business interests and the Site Provider’s desire for stability. Its proposals more closely mirrored the term of the existing Lease (with a minimum five-year term).
Outcome
The Court imposed a ten-year term with a tenant break clause exercisable on the fifth or subsequent anniversary of the term. The Court rejected the Site Provider’s inclusion of a vacant possession condition.
The Court said it had balanced the needs of the Operator’s business and “the rights which Parliament intended operators to enjoy under the Code” against the Site Provider’s desire for stability and a “respite from uncertainty and expense”.
The Operator’s proposals would lead to unjustified uncertainty and were considered “unfair to the landlord”. Limited weight was given to the looming appeals.
Negotiation and Paragraph 17 of the Code were cited as two available outlets for an Operator seeking to upgrade, subject to the conditions set out in that same paragraph. Evidence of comparable New Code agreements factored into the Court’s thinking – these showed operators had willingly agreed 5+ year break clauses reasonably consistently.
The Court cited the changing technological climate as a refusal to include a vacant possession condition, accepting the Operator’s argument. It recognised that a break clause without the need to give VP would present an “opportunity for renegotiation at annual intervals” which would “allow Vodafone to modernise both the agreement and its apparatus”, and recognised that Paragraph 17 might fall short of servicing those requirements.
- Rent
The Court determines rent pursuant to Section 34 of the 1954 Act. Rent is valued by reference to a hypothetical open market agreement between a willing landlord and tenant. It must properly factor all other terms agreed into that valuation (including the term and break clause above).
There were several differences in approach between the parties’ experts, most notably the relevance (if any) of the New Code’s “no network assumption” to valuations under the 1954 Act. It was common ground between experts that Section 34 does not include this assumption, but the Operator’s expert argued it would provide a “framework for the negotiation”, given that both parties would be negotiating in its shadow.
The Site Provider’s expert relied on comparable transactions as being representative of what would happen in a hypothetical open market valuation. The expert sought to illustrate that there had been “little or no softening of rent since the days of the Old Code” and, referring to 13 other transactions which completed between January 2018 to July 2019, proposed a rent of £8,000.00 p/a (£6,000.00 + a £2,000.00 uplift for site sharing).
The Operator’s expert argued the Court must consider the most valuable alternative use to the site provider (excepting telecommunication), which in this case was car parking. Transactions were disclosed showing examples of rents negotiated under the New Code. The proposed rent ranged from £1,386.00 p/a to £1,715.00 p/a.
Outcome
The Court raised issues with both methodologies. The Site Provider’s comparables were of varying assistance and were largely negotiated before the commencement of the New Code (often including a “caveat” designed to prevent the agreement from being considered a New Code comparable).
The Operator’s expert was criticised for not properly placing the hypothetical transaction in the open market, in which an assumption must be made that the hypothetical landlord has offered the Site to operators for use as a mast site on the agreed terms. This was necessary for the methodology to fit within Section 34 and resulted in at least two hypothetical tenant operators bidding for the Site in the hypothetical open market.
The Court grappled with Old Code comparables, incentives and the absence of a rent review before determining a rent of £5,750.00 p/a. This was summarised as a “rent based on the value of the Site to the operator, not its value to the owner”. The attractiveness of the Site meant there would, in effect, be a bidding war between hypothetical tenants in the open market.
However, the Court did leave open the door for the prospect of lower rents where sites only satisfy the needs of one operator.
What does this all mean?
This is, we should remember, a County Court decision under the 1954 Act determining the terms of a new tenancy. In ordinary circumstances, it would be rare for such decisions to cause a great deal of excitement or to be cited in future cases, due to their non-binding nature and the number of higher court 1954 Act decisions already determined. It may of course be appealed.
The difference here is, of course, the telecommunications context. It is no great secret that site providers and operators continue to disagree on many aspects of the New Code. This is the first decision which directly addresses valuation in a 1954 Act telecommunications renewal.
As it was heard by the Deputy President of the Tribunal it will be given additional weight. The Judgment refers to the Operator bringing it as a “test case” and refers to the “significance of the outcome for its wider estate”.
This might suggest that the Operator expects the Judgment to drive behaviours (including its own?) in the market. It will almost certainly be referenced in negotiations between parties and in County Court decisions by Judges less versed in telecommunications law. However, higher court 1954 Act authorities still hold more weight.
The Court made it clear that it would not stray from established Section 34 valuation principles, ultimately determining a figure closer to the Site Provider’s proposal. It also refused to impose terms which were designed to allow the Operator to take advantage of future changes in the law at short notice, largely preferring the Site Provider’s arguments on term length and break clause.
However, the Court also recognised the need for operators to renew existing agreements in tandem with future technological upgrades and rejected the Site Provider’s vacant possession condition.
Comments regarding Paragraph 17, another area ripe for dispute, will be read with interest. The Tribunal may yet determine questions surrounding Paragraph 17 on another day, but the Deputy President has provided at least some insight into his interpretation of that Paragraph.
Ultimately, there are positives and negatives in this case for both parties involved. Whether this Judgment will have any meaningful influence on future negotiations is debateable. Cases under the 1954 Act will turn on their own facts, market conditions and the site in question. Another Judge on another day might follow another line of argument.
This case provides some useful non-binding guidance for determining terms in a very specific scenario – existing sites where operators occupy under subsisting agreements which are being renewed under the 1954 Act. As such, it is unlikely that will have any real bearing on the bigger issues at play – the need for new sites and better coverage via New Code agreements.
O’May v City of London Real Property Co. Ltd. [1983] 2 A.C. 726 at 747
CTIL v Ashloch Limited C3/2020/0107, due to be heard by the Court of Appeal in January 2021 and CTIL v Compton Beauchamp Estates Limited C3/2019/1330, making its way to the Supreme Court
